Expect a rate cut tomorrow: AB

Although sentiment towards Australia’s economic outlook has improved in recent weeks, further monetary easing is still likely, says AB.

According to an article titled Australia: Has the story changed? AB argued that the fundamentals which prompt a rate cut have not improved significantly enough.

“First, the downswing in the commodity super cycle will continue to cast a very long shadow, and the adjustment to lower commodity prices is a multi-year affair,” said AB senior economist of Asia Pacific Guy Bruten.

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“Second, the so-called ‘rebalancing’ of growth from the mining sector to the non-mining sector will be a rocky path."

Improved sentiment regarding Australia’s economic outlook is attributed to better employment figures, a lift in business confidence and a bounce in iron ore prices.

But the “story hasn’t changed” that much – therefore a cut is still likely, Mr Bruten said.

Mr Bruten pointed out that the jump in iron ore prices, to $60, is nothing in the context of the downtrend that brought prices down from $180.

While employment figures have improved, this is due to the housing construction upswing, he said.

“Once that upswing starts to top out, the lopsided nature of the rebalancing will quickly become apparent,” Mr Bruten said before adding: “A further rise in unemployment seems inevitable.”

“We continue to see the likelihood of further monetary easing and further weakening in the currency."

Mr Bruten concluded that a poorly delivered federal Budget on 12 May, job growth disappointment, and dovish RBA rhetoric and action will be the catalysts that will push sentiment back the other way.

“That’s what we expect, and we see no reason to change our big-picture view,” he said.